Did you see this MotleyFool post today?
It's an almost 2 month old report apparently based on a "meeting" Wedbush Morgan Securities people (remember these guys previous 12 month "projections" for the stock's price) had with INSP representatives:
thelion.com
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INSP - Positive Meeting with InfoSpace
01:24pm EDT 17-May-01 Wedbush Morgan Securities
WEDBUSH MORGAN SECURITIES
RESEARCH NOTE
May 17, 2001
InfoSpace, Inc. (INSP - $4.39)
Scott P. Sutherland, CFA (213) 688-4522
scott.sutherland@wedbush.com
Timothy Leehealey, CFA (213) 688-4539
tim.leehealey@wedbush.com
Tucker Oakley, (213) 688.4370
tucker.oakley@wedbush.com
InfoSpace, Inc., based in Bellevue, Washington, is a leading global provider of cross-platform merchant and consumer infrastructure services on wireless, broadband, and narrowband platforms. The Company provides commerce, information, and communication infrastructure services to wireless devices, merchants, and Web sites. InfoSpace's affiliates encompass a global network of wireless, PC, and non-PC devices, including cellular phones, pagers, screen telephones, television set-top boxes, online kiosks and personal digital assistants.
InfoSpace's affiliate network also consists of more than 3,200 Web sites and over 20 wireless carriers.
There's a Light at the End of the Tunnel.Positive Meeting with InfoSpace
(PART 1 OF 2)
Current Rating STRONG BUY 12-month Price Target $8
52 Week Price Range $1.56 - 73.75 Long Term Debt ($ million)
N/A
Shares Outstanding ($ million) 323.1 Debt/Equity
N/A
Institutional/Insider Ownership 16% / 31% ROE
N/A
Public Float (million) 226 Book Value/Share (Q1:01)
$3.70
Market Capitalization (million) $1,418 Cash & Equiv/Share (Q1:01)
$1.39
FYE DEC 2000A 2001E 2002E
EPS ($) ACTUAL CURRENT CURRENT
Q1 $0.02 $(0.02)A $0.02E
Q2 $0.02 $(0.01)E $0.02E
Q3 $0.03 $ 0.00E $0.03E
Q4 $0.04 $ 0.02E $0.04E
YEAR $0.14 $(0.01)E $0.11E
P/E RATIO 31.4x n/m 39.9x
3 YR GROWTH RATE 60%
FYE DEC 2000A 2001E 2002E
Revenue ($mil) ACTUAL CURRENT CURRENT
YEAR $214.6 $221.7E $320.6E
Last Friday, we met with key members of InfoSpace's management to cover the Company's positioning in the market and to discuss how the Company has put a tumultuous past six months behind it. In particular, we met with Naveen Jain, Chairman and CEO; Ed Belsheim, COO, Tammy Halstead, CFO, Prakash Kondepudi, EVP of Commerce Services, and Michael Riccio, EVP of Broadband Services. We covered all four segments of InfoSpace's business, discussed new technology endeavors, met with several engineers that have been key to the Company's technology, and toured its facilities including the state-of-the-art hosting center.
In addition, we have had several discussions this week with wireless carriers and other partners at the Wireless Agenda conference in Dallas. Overall, we came away impressed by management's ability to refocus as the Company recovers from the recent instability and believe that Q1:01 was the low point for InfoSpace. Based upon these meeting, we have decided to revisit the InfoSpace story from the information we received, which is detailed in the following report.
WIRELESS SERVICES
Strategy: InfoSpace provides a technology platform to wireless carriers that allows them to offer integrated, localized, and personalized information and applications to their wireless customers. The Company's goal is to provide wireless carriers with a one-stop shop for wireless services and to work with them to provide a migration path to 2.5G and 3G wireless data infrastructure and services. Currently, InfoSpace provides two platforms of services; consumer and mobile commerce.
Technology: Over the last quarter, InfoSpace has initiated two major Technology endeavors. First, InfoSpace is opening up APIs to allow third-party application and content providers to write to its platform. Through this, InfoSpace will be able to create an ecosystem that will enhance the value of its platform used by carriers. This ecosystem will allow carriers to pick the application and content providers they want integrated into the InfoSpace platform, thereby allowing them to differentiate themselves. This was a strategic move in response to demand from application providers eager to benefit from InfoSpace's extensive wireless distribution network and from wireless carrier looking to offer a differentiated product to their customers. The second major initiative is the move to offer a premised-based solution, where carriers can host the InfoSpace servers themselves. This provides carriers with the ability to have greater control of the wireless data services offered to their customers.
Partnerships: This is one area InfoSpace continues to excel. Over the past year, the Company has established strategic partnerships with Nortel Networks, Lucent Technologies, and Compaq to bundle InfoSpace's technology with their solutions to wireless carriers. In addition, InfoSpace has established relationships with TIW, Tata Consultancy, and ChinaBig among others from which we are already seeing some traction with wireless carriers. In particular, we believe the Company has two trials with Nortel and Lucent each, has launched at least four carriers with TIW, and has launched directory services through ChinaBig with China Unicom.
Customer Traction: Recently, it has been questioned whether InfoSpace's 17 wireless carrier customers for its platform would renew when contracts became due over the next two years and if renewals would be below the $1 to $2 per subscriber per month the Company currently receives. Based upon our discussions with carriers at CTIA's Wireless Agenda this week in Dallas and InfoSpace, we believe the Company is becoming deeply integrated with customers such as Cingular Wireless, Alltel, and Verizon Wireless.
In particular, InfoSpace indicated it is dedicating teams to ensure carriers can offer their customers dependable and compelling wireless data services. Due to this, we believed InfoSpace has shored up relationships with its wireless carrier customer, although we fear some damage was done during the Company's management overhaul and lack of execution over that period. As for renewal rates, management indicated that pricing would be an issue if no enhancements to the platform were made. However, similar to how Microsoft Office is able to pack more applications at the same price point, InfoSpace intends to add new functionality such as games and to maintain its value. For example, InfoSpace integrated games and search with its current offering to Alltel and has added Spanish language functionality to Cingular Wireless. While the current economic environment has had a short-term negative impact on the Company, we believe it will benefit long term, as smaller competitors disappear and carriers become more hesitant to partner with less established companies. Although InfoSpace's primary goal is to add value to its current customers, we are seeing some international traction with 8 Brazilian and 3 European carriers signed for its platform and 7 others signed for SMS services. Of particular note, we believe InfoSpace's relationship with Virgin Mobile will be interesting to watch as Virgin aggressively expands to international markets including Asia, Australia, and the U.S. Also, we believe the addition of an executive from Telstra, will aid the Company as it pursues carriers in Asia-Pacific. Lastly, we will closely watch InfoSpace's relationship with China Unicom as it is the second largest carrier in the quickly growing Chinese Market with almost 13 million wireless subscribers.
Revenue Model: For Q1:01, Wireless Services represented 20% of InfoSpace's revenue. The Company currently has 27 wireless carrier relationships that we have identified. Of the 27, 20 carriers have launched on InfoSpace's platform, representing an addressable market of 90 million subscribers. Currently, these carriers have 2.0 million wireless data subscriber, of which 1.5 million are active and generate on average $1.58 per month each to InfoSpace. In our model, we estimate the Company's addressable market will increase to 177 million with a conservative 15% data penetration rate by 2004. This equates into 26 million wireless data users, which we estimate will generate $1.02 per month each.
Business Outlook: As little as three months ago, we were concerned with InfoSpace's positioning in this segment, especially with the loss of Arun Sarin. In particular, the primary complaints included lack of attention from InfoSpace regarding technology issues, lack of broad differentiation in InfoSpace's technology, and the desire to have more control of wireless data services. However, we believe InfoSpace is addressing these concerns and has made appropriate changes to maintain its positioning. Therefore, we believe our estimate for InfoSpace to finish FY:01 with almost 5 million wireless subscribers is achievable if the Company just maintains its market share and benefits from industry growth. This growth will be driven near term by the adoption of packet-based GPRS networks by wireless carriers and the promotion of wireless data services expected from carriers such as Cingular Wireless this summer.
COMMERCE SERVICES:
Strategy: InfoSpace provides a suite of commerce services to over 2 million merchants, which it distributes across its broad network of affiliates. InfoSpace uses partners including RBOCs, media companies, and financial institutions to offer these services to merchants. The Company's primary goal is to drive transactions through its network of partners both online and offline. To do this, InfoSpace utilizes its transaction gateway, Authorize.net, and its Prio promotion technology that is integrated into the credit card infrastructure.
Technology: The Company currently sells a suite of services including shopping, enhanced listings, online store builder, promotions, and payment authorization. Recently, InfoSpace has incorporated several new applications including Pocket Authorize.net, which allows the use of wireless devices such as PDAs to process transactions, reverse auctions through its relationship with NetGenShopper, and inventory management through a relationship with Found.
Customer Traction and Partnerships: Over the last couple of quarters, InfoSpace has established key relationships for its commerce services including Verizon Information Services, Toshiba, American Express, First Data, and Cingular Wireless. Between Toshiba and Verizon alone, InfoSpace is able to reach several million additional merchants with its platform of services and will integrate Verizon's merchants across its platform. In addition, the American Express relationship could prove to be a huge win for InfoSpace, as the ShopAmex portal, which includes comparison-shopping, promotions, and store building will drive significant transactional revenue through InfoSpace. In fact, we believe this is a primary reason we saw strong growth in transactional revenue over a seasonally strong Q4:00 in Q1:01. Lastly, by licensing its commerce platform to Cingular Wireless, InfoSpace will participate in the emergence of m-commerce and gain early experience in this market.
Revenue Model: In Q1:01, Commerce Services represented 20% of total revenue. In this area, InfoSpace receives both transaction and licensing revenue. In the most recent quarter, InfoSpace enabled over $500 million in gross transactions for which it received 0.7% to 1.1% of gross transactions. This compares to $449 million in gross transactions in a seasonally strong Q4:00. InfoSpace receives two primary transaction streams payment authorization and promotions. For payment authorization, we estimate InfoSpace receives less than 1.0% of gross transactions while for promotions, we believe the Company can receive 2% to 25% of the total transaction with service-based promotions generating the higher rate. The remaining revenue in this area comes from licensing fees from partners offering InfoSpace's services to merchants. For our model, we believe transactions will be the primary driver of revenue and estimate the Company will process almost $2.7 billion in gross transactions in FY:01.
Business Outlook: We believe the outlook for Commerce Services is solid for several reasons. First, the Company's ability to partner with over 2 million small and mid-sized merchants will be difficult to replicate. Second, InfoSpace has created a broad distribution platform to distribute these merchants to consumers. Last, InfoSpace provides end-to-end applications to drive the transaction process leveraging the power of the Internet. Overall, we believe the Company's Commerce Services area should experience strong growth and provide InfoSpace with a competitive advantage as the market for m-commerce emerges.
Therefore, we believe the primary risk depends upon the size and speed of development of the commerce market enabled by the Internet for both online and offline transactions.
WIRELINE SERVICES
Strategy: InfoSpace powers information and applications to an affiliate Network of customers that has grown to more than 3,200 Web sites. These private-labeled services cover the areas of information, commerce, community, entertainment, and communication services and have an unduplicated reach to more than 92% of all Internet users. With a broad affiliate network, InfoSpace's strategies in this area going forward is to cross-sell new applications to current customers and enter into partnerships to expand its presence in international markets.
Technology: InfoSpace uses a template to private-label its suite of services for affiliates including ISPs, portals, and other destination sites. Its technology seamlessly integrates with its affiliates site, maintaining the site's look and feel. Through the acquisition of Go2Net, InfoSpace added or enchanced applications including search, message boards, and games. Customer Traction and Partnerships: Although InfoSpace does not detail each customer in this area, we believe it is gaining traction with its new applications and expanding successfully to international markets. For example, InfoSpace announced 6 new customers for its search services last quarter including NetZero. While we believe affiliates are still having difficulty in the U.S., we are seeing the Company gain customers in international markets including the United Kingdom and Germany.
Revenue Model: Last quarter, InfoSpace changed the metrics for this segment by measuring growth through a per query basis. Through our discussions with management, we believe this is the most accurate method as it mirrors how the Company typically structures contracts with its affiliate partners. In Q1:01, InfoSpace executed over 4 billion queries at a rate of $0.003 to $0.007 per query. We expect to see growth in this segment of 7% per quarter over the next year and total of almost 18 billion queries in FY:01. Lastly, we expect the percentage contribution of advertising in this segment to continue to decline as InfoSpace continues to de-emphasize this business.
Business Outlook - Was Q1:01 the Bottom?: Over the last two quarters, business has been challenged in this area. In addition to a deteriorating economic environment affecting several of InfoSpace's affiliates, the Company also entered into direct to consumer operations through its acquisition of Go2Net that did not fit into its core strategy and competence. With that said, InfoSpace has taken its lumps in Q1:01 as it de-emphasized the direct to consumer business such as Silicon Investor and ######## at the end of Q4:00.
As for the economic environment affecting affiliates, management feels the bottom was seen last quarter and that cross-selling and international endeavors will offset some lingering losses. However, we continue to believe some fairly significant customers are still at risk, challenging growth for the next couple of quarters.
BROADBAND SERVICES
Strategy: InfoSpace plans to offer a comprehensive portal infrastructure for media companies and broadband carriers targeting consumers and businesses through broadband connections. These connections include the PC (DSL & Cable), interactive TV, and eventually 3G wireless distribution platforms. Currently, the Company has signed several initial customers and has integrated almost 500 feeds from content and application providers. In addition, InfoSpace plans to integrate services from its wireline business with the look and feel necessary for broadband connections. Finally, we expect InfoSpace to integrate its broadband solutions with its wireless products to deliver a cross-platform solution, as with Alltell.
Technology: In addition to incorporating existing wireline applications, InfoSpace is developing new applications such as streaming media, interactive gaming, and photo albums that are targeted to broadband customers. For interactive TV, the Company also integrates interactive triggers and IP content into streaming broadcast to provide an enhanced experience to end-users. Customer Traction and partnerships: Over the last quarter, InfoSpace has been active in signing partnerships to position itself for growth in Broadband Services for 2002 and beyond. In particular, InfoSpace has signed Relationships with the leading middleware providers including Microsoft, OpenTV and Liberate to ensure interoperability. In addition, InfoSpace has signed partnerships with several providers of streaming content.
Lastly, InfoSpace has established a partnership with Digeo, which will use the InfoSpace technology to power services for customers such as Charter Communications. Although we expect revenue from this segment will not be significant until 2002, the Company has signed customers including Alltel, Charter Communications, Allegience Telecom, Bloomberg and others, which should start to generate some revenue this year.
Revenue Model: Although no firm revenue model has been established as of yet, we believe pricing will be similar to its wireless services where InfoSpace generates approximately $1 to $2 per user per month. However, as InfoSpace begins to offer enterprise portals to the SME market, we believe per user rates could be significantly higher. We currently estimate InfoSpace will generate less than $3 million in total revenue in this segment for FY:01.
Business Outlook: Although management is projecting negligible contribution from this area in FY:01, we believe we could start seeing early signs of growth by the fourth quarter as InfoSpace has already signed several customers and as broadband connections and set top boxes are starting to get deployed. In addition, we believe the Company's relationship with Vulcan Ventures and Paul Allen can be used to leverage relationships with several of their broadband properties.
Lastly, we believe InfoSpace's ability to develop applications now; will provide long-term competitive advantages in the wireless market as broadband 3G wireless emerges in a few years. However, we believe the continued delays in the broadband and 3G markets could postpone the opportunity in this area, therefore our growth projections are tempered in FY:02 until we see more evidence of broadband deployment.
UNDERLYING INFRASTRUCTURE TECHNOLOGY
InfoSpace provides the underlying technology platform that enables content to be actionable and monitized, which is important in today's environment as companies look to solutions that provide a sensible business model. We believe this underlying technology is a key reason why leading wireless carriers and equipment manufacturers such as Lucent, Nortel, Intel, and Compaq have partnered with InfoSpace.
CONCLUSION - "Not Out of the Woods Yet but its Looking Brighter"
Overall, we are more comfortable with InfoSpace's positioning going forward through our meeting with key management and discussions with wireless carriers and partners this week at the Wireless Agenda conference. In particular, due to strong growth in transactional and wireless revenue combined with stability in wireline services, we are becoming more comfortable with Q2:01 estimates. In addition, we were surprised to see such a refocused management and engineering team after the tumultuous six months they just went through. In our opinion, during those last six months, InfoSpace lacked the execution necessary to pursue its market opportunity to sustain growth and through the acquisition of Go2Net found itself in businesses not core to its business model.
However, we must point out, Go2Net brought several pluses to InfoSpace including payment processing technology, search technology, entertainment applications, a broadband platform and relationships, and added more merchants to its network.
With that said, we continue to believe the execution risk is high in this stock as the Company has several moving parts. We believe the Company cannot afford another slip in this fast moving market with demanding customers. In sum, we believe the Company's customer base, partnerships, and technology position it for solid and sustainable growth over the next several years. In addition, with approximately $1.40 in cash and investments and the expectations for the Company to be profitable in Q3:01, we believe downside risk is limited.
If the Company is able to execute this time around, we believe upside is significant. However, with only one solid quarter behind the Company and some new metrics to measure performance, we recommend risk adverse investors maintain caution until another quarter of execution is demonstrated. With that said, based upon strategy, technology, market positioning, and valuation, we are reiterating our STRONG BUY rating as we believe InfoSpace is on the road back. |
